O.C. mortgage rates jump on Fed move

October 8th, 2008, 11:37 am · 5 Comments · posted by Mathew Padilla

Mortgage rates jumped in Orange County today after the Federal Reserve did an emergency cut of its key Fed Funds rate half a point to 1.5%.

Al Hensling, head of loan brokerage United American Mortgage in Irvine, said there is no clear explanation for why mortgage rates spiked, but it often happens after a Fed cut. Later, as markets have time to digest the news, mortgage rates will stabilize and eventually dip, he said.

The best rate on a 30-year fixed-rate loan up to the old conforming limit of $417,000 rose to 6% with a one-point fee, up from 5.75% earlier in the day, Hensling said.

And rates on larger loans up to nearly $730,000 climbed to 6.25% with a one point fee, up from 6%.

Fixed mortgage rates are only loosely associated with the Fed’s short-term rate and are more directly tied to mortgage-backed securities, experts say.

However, the prime rate, which is the basis for home equity lines of credit, dropped to 4.5%. So borrowers with adjustable rates on their HELOCs will immediately benefit, Hensling said.

Hensling said there is a 50-50 chance that the Federal Reserve will cut rates again when it meets on Oct. 28.

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Brian says:

October 9, 2008 at 7:14 am

Unbelievable. As if there aren’t already enough problems with the housing market.

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Engineer says:

October 9, 2008 at 9:05 am

Matt,

These numbers seem completely out of whack (?). Here is the latest rates from Wells Fargo

https://www.wellsfargo.com/mortgage/rates/?ref=patrick.net

Matt Padilla, Register Reporter and Blogger says:

October 9, 2008 at 10:16 am

Engineer,

I checked the Wells page you posted, and it had 30-year conforming at 6.125%. At first I thought that might be the one-point origination fee difference, but Wells does say all rates quoted are with a one-point fee (it’s at the very bottom of the page). So Wells is slightly higher than Hensling, who said 6%. Not that big of a difference, though.

October 9, 2008 at 10:21 am

Another thing is that Wells does just conforming and jumbo. Hensling does conforming up to $417,000 and jumbo-conforming, which is $417,001 to nearly $730,000. So he is quoting to different rates of 6% and 6.25%, while Wells is quoting one blended rate at 6.125%.

I did not ask Hensling for a jumbo quote, but in the past he has said they are above 7%. Looks like Wells has them now at 9% plus.

guysmilie says:

October 9, 2008 at 1:35 pm

Mortgage rates have nothing to do with MBS these days. High credit quality MBS senior securities are trading at 75 when they do trade (by appointment only please!) This implies a yield on the security over 10%, even with draconian loss assumptions. Lower losses mean higher yields. Whole loans would trade 10 points under the senior security. If MBS buyers were setting jumbo rates on home loans today, they would be 15%.

Wells if putting those 9% loans in its portfolio and expects to earn a nice yield to maturity far in excess of what it thinks is its cost of capital. If they sold them into the market, they would take a serious loss on each one. Of course, if Wells tries to raise capital, they will find out their true cost of capital. Just look what happened to Bank of America when it tried to tap the market for $10B. Good luck to them if they try to raise $20B to buy Wachovia. Fannie and Freddie are subsidizing conforming mortage rates in the same way.

Essentially, the government is setting mortgage rates now, and portfolio lenders are helping some. MBS isn’t there anymore. Without the government propping out the mortgage market, loans would be very expensive.

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